OECD and the Economics of Climate Change

Remarks by Angel Gurría, OECD Secretary-General at the High Level Segment of United Nations Framework Convention on Climate Change (UNFCCC)

Bali, Indonesia, 14 December 2007

Mr. Chairman,Ladies and Gentlemen,

The ambitious and comprehensive policies necessary to tackle climate change are known, available and affordable.

The OECD has arrived at this conclusion after working for nearly two decades on the economics of climate change. Our Environment and Economics teams are focusing on the policy instruments and incentives for co-operative action in the post-2012 climate architecture. Next year’s OECD’s Ministerial Council Meeting in June 2008 will focus precisely on “the economics of climate change”.

Our OECD Environmental Outlook, to be launched next March in Oslo, concludes that, to put us on the path to stabilising greenhouse gases in the atmosphere – at about 450 parts per million in carbon dioxide-equivalents – would reduce global growth by only about one tenth of one percent per year (on average) from now to 2050. This is an affordable cost, given our expectations for growth and living standards in the coming years, and the calculations of the cost of inaction, which would be invariably more onerous.

We aim to build a solid economic footing for the post-2012 era

Addressing climate change is a development, economic and investment imperative. The post-2012 climate framework must rely on a solid economic footing to have a chance to succeed. The presence here earlier in the week of finance ministers and representatives of international organizations, is a clear aknowledgment of this imperative.

However, in our quest to limit the cost of adaptation and mitigation, we need to be accurate and to act upon evidence-based information. For example, a number of countries have focussed their climate change policies on subsidising the “good” solutions, rather than on taxing the “bad” ones. This is an inefficient choice, because it tends to increase the costs of reducing GHG emissions.

Subsidising “good” behaviour risks locking in technologies that may later be considered obsolete or inefficient. On the other hand, taxing bad behaviour (emissions), provides a consistent incentive for increased efficiency and innovation.

And innovation is key to improving our prospects of success. Advances in energy technologies and improved energy efficiency can achieve major reductions in emissions by 2050.

A fundamental question remains: how do we manage this transition to a low carbon world in an economically efficient and socially responsible manner?

Although it is frequently cited as a solution, our work shows that many developing countries may face far bigger GDP losses than the industrial world if a uniform global tax is used. For example, in the 450 ppm scenario, the OECD would lose 2 tenths of a percentage of GDP by 2030, and 1.1% by 2050, but Brazil, Russia, India and China (BRIC) could lose five times as much.

And this is where the political economy of climate change comes in. The real problem is not how much it costs but who pays for it. Fair burden-sharing is largely a political call.

The OECD is examining ways to distribute the burden of the costs of action in an equitable and fair manner, while ensuring that mitigation action takes place wherever it is least costly, which should make it easier to negotiate who pays for what and to overcome political deadlocks.

Compared to the introduction of a uniform global tax, a global emissions trading permit system could significantly lower the impact on developing countries of achieving aggressive global emission reduction targets. This can be done through differential target setting and allocation of emission permits. Thus, developed countries could undertake a relatively greater financial responsibility for emissions reduction than developing countries.

The OECD can make an important contribution

The right solutions require political will, from both developed and developing countries, as well as the best technical expertise. The OECD is ready to help put the post-2012 climate regime on a solid economic footing. We have developed a better understanding of the threats, and of the impact and effectiveness of alternative solutions.
Mr. Chairman: I agree with those who regard the necessary transformation to a low carbon future as an opportunity to move towards smarter and more sustainable energy choices, ways of production and lifestyles.

We know the enemy, it is called carbon. We can beat it. We know how. We can afford it. Let us get on with it.